This white paper by Todd Litman of the Victoria Transport Policy Institute, just issued the Pacific Institute for Climate Solutions, looks at the potential for Pay as you Drive (PAYD) insurance both in general and in the specific case of British Columbia. With Pay as you Drive – i.e., “context sensitive insurance” — what you pay for this big-ticket item is conditional on not only distance travelled but also time and place. The concept has been around for decades but has started to gain traction in the last half dozen years. Let’s have a look.

Identifies Significant Potential Benefits to Motorists, the Economy and the Environment.

– By Todd Litman

Insurance is one of the largest motor vehicle expenses, costing about $1,200 annually for a typical automobile. Conventional insurance is a fixed cost with respect to vehicle use; moderate reductions in vehicle travel provide no savings to motorists. An alternative price structure, called Pay-As-You-Drive (PAYD), changes insurance into a variable cost, so motorists save money when they reduce their mileage. As a result, they tend to drive less.

A new report, Pay-As-You-Drive Vehicle Insurance in British Columbia, just issued by the Pacific Institute for Climate Solutions evaluates the feasibility, benefits and costs of Pay-As-You-Drive insurance in British Columbia. The analysis indicates that PAYD pricing could provide significant benefits to motorists, the economy, and the environment.

Various studies indicate that reducing vehicle travel reduces crashes. PAYD does not simply shift costs from one group to another: premium reductions reflect, in part, the savings that result when motorists reduce their annual vehicle mileage and therefore claim costs. As a result, it need not reduce insurance company profitability.

Under most proposals PAYD would be a user option, so motorists could choose the price struc­ture that best meets their needs. Only motorists who expect to save money would choose PAYD.

In addition to consumer savings, PAYD pricing tends to reduce energy consumption, carbon and other pollution emissions, and traffic congestion. It increases insurance affordability by giving motorists a new way to save money, and it is progressive with respect to income since lower-income motorists tend to drive less than average.

The report evaluates several possible implementation methods. A relatively simple approach, called basic PAYD, prorates existing premiums by the average annual mileage of each rate class, so a $600 premium becomes 3¢ per kilometre, and a $1,800 premium becomes 9¢ per kilometre. Mileage can be verified with digital photos taken by motorists or insurance brokers at the
start and end of the policy term. Because it has low implementation costs, this approach is predicted to have the largest potential market and provide the largest savings and benefits.

PAYD insurance is not currently available in British Columbia but has been implemented else­where, including in the United States, Europe and Australia.

* The White Paper offers an extensive bibliography of references and information sources.

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About the author:

Todd Litman is executive director of the Victoria Transport Policy Institute, an independent research organization dedicated to developing innovative solutions to transport problems. His work helps to expand the range of impacts and options considered in transportation decision-making, improve evaluation techniques, and make specialized technical concepts accessible to a larger audience. He can be reached at: 1250 Rudlin Street, Victoria, BC, V8V 3R7, Canada. Email: litman@vtpi.org.